What the ECB Did in Greece, & More

Now that the much-awaited Greek debt-exchange offer has been launched, a few buried nuggets are rising to the surface. For instance, we Greek debt wonks have long wondered just what Greek bonds the European Central Bank had been buying during its forays into the secondary market in 2010 and 2011.

Well, we finally have a pretty good idea. Interestingly, the central bank’s holdings include about a third of the famous €14.5 billion Greek bond due to mature on March 20, the one that everyone was worried about. If chaos had reigned and Greece had imposed a moratorium on repayments, the central bank would have been one of the bigger losers. (Yes, it still could happen.)

In order to keep the ECB out of the restructuring, Greece gave the ECB fresh new bonds this month in exchange for the bank’s holdings. Then, Greece restricted the restructuring to bonds issued prior to 2012. Voila, ECB excluded.

For the moment, Greece now holds the ECB’s old Greek bonds. In the offer document proposing the restructuring, Greece discloses that it holds €56.5 billion worth of its own bonds, “substantially all” of which it acquired from the ECB or from other euro-zone central banks. The document also presents a table of the amount of each bond outstanding that’s eligible for the restructuring–in other words, everything that wasn’t owned by the ECB or the other central banks.

Starting with a table of Greek debt from before the restructuring offer, and employing a bit of subtraction, we can figure out what the central banks held. We count 22 bonds suggesting central-bank holdings of €55.5 billion. They are:

Maturity

Coupon

Total €M

Central Bank

20 March 2012

4.3%

14,500

4,734

18 May 2012

5.25%

8,060

3,394

20 Aug 2012

4.1%

7,845

3,259

20 May 2013

7.5%

2,497

1,005

20 May 2013

4.6%

9,079

4,588

20 Aug 2013

4.0%

5,850

2,170

11 Jan 2014

6.5%

4,552

1,853

20 May 2014

4.5%

8,523

4,154

20 Aug 2014

5.5%

12,500

3,959

20 July 2015

3.7%

9,061

2,968

20 Aug 2015

6.1%

8,000

3,188

20 July 2016

3.6%

7,750

2,308

20 Apr 2017

5.9%

5,000

1,354

20 July 2017

4.3%

11,440

3,878

20 July 2018

4.6%

7,732

1,856

19 July 2019

6.0%

15,500

3,752

22 Oct 2019

6.5%

8,192

2,017

19 June 2020

6.25%

5,000

1,366

22 Oct 2022

5.9%

8,931

1,307

20 March 2024

4.7%

10,462

1,305

20 March 2026

5.3%

7,000

937

20 Sept 2037

4.5%

9,000

133

This isn’t an exhaustive list; we avoided floating-rate notes and zero-coupon bonds, and our total is €1 billion less than the document says is now in Greece’s hands. We also can’t separate what was purchased by the ECB during its bond-buying spree and what was held in national central-bank investment portfolios. (We’re also assuming that the lawyerly “substantially all” means “all.”)

But the bulk comes from bond purchases–around €45 billion, compared to about €12 billion in investment portfolios.

It’s also clear that the central banks were–in fact, still are–exposed heavily to the risk of a messy default in the near term: Of the holdings, €11.4 billion was due to mature this year.

Other interesting bits:

A breakdown of the €206 billion in eligible bonds shows that €21 billion are “foreign-law” bonds that won’t be subject to the new collective-action clauses (CACs) that stand ready to force the exchange on all holders of the Greek-law bonds, whether they want to swap or not.

Will those clauses be triggered? It seems very likely. The offer document has a “Minimum Participation Condition” that describes how Greece intends to act. It implies that Greece will complete the exchange without triggering the CACs if it gets 90% participation of all bonds. But, as Credit Suisse analysts point out, the €21 billion in foreign-law bonds is, handily, just over 10%, “so the maximum amount that could be tendered if every single Greek-law bondholder volunteered for the exchange would be just shy of 90%.”

It is possible that Greece could wait to see if enough foreign-law holders volunteer for the exchange to put it over 90%–they declare after the Greek-law holders–but the likelihood is small.

If Greece gets between 75% and 90% participation, it says it may do the exchange without triggering the CACs, but “in consultation with its official sector creditors”–i.e., Germany.

It is hard to see Germany agreeing to let a big chunk of bondholders off the hook while its taxpayers continue to pay for the Greek rescue.

Comments (5 of 7)

I agree with Ace, cds only functioning and liquid instrument in credit.

12:05 pm February 28, 2012

ace wrote :

cds has nothin to do withi this. people over borrow.

4:50 am February 28, 2012

uglysexy wrote :

until credit default swaps are made transparent, regulated and traded on exchanges...the world monetary system will continue to be at risk...no matter what is done with insolvent countries

4:03 am February 28, 2012

Mike13 wrote :

Why do you mention "if chaos had reigned"? Why didn't Greece impose a moratorium on its repayments back in 2009? To get its books in order and to see the true extent of the debt? Why would "chaos" have to reign for Greece to reach such a decision?

4:51 pm February 27, 2012

MDM wrote :

IMO an orderly default could be made by Greece printing Drachmas and leaving the EU. Banks holding bonds that do business in Greece could continue to do business based on the exchange rate with the Drachmas and bond holders who did not do business in Greece could sell their bonds on the secondary market to investors who do do business in Greece.

Thanks for reading MarketBeat. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.